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According to estimated figures from the Institute of Economic Affairs (IEA), almost one million more people could be paying tax at the higher rate of 40 per cent by 2020, even if the Chancellor increases the thresholds.

Data from HM Revenue & Customs (HMRC) reveals that 4.6 million taxpayers currently fall within the higher rate tax bracket, which is income above £41,900 for the year 2014-15. During the annual conference for the Conservatives, David Cameron pledged to make the tax system fair for all, and one of the proposed changes would be to increase the higher rate income threshold to £50,000 by the year 2020. The estimated figures indicate that 5.5 million people would be paying 40 per cent tax, which is 900,000 more than at present.

According to the Prime Minister, the higher rate of tax was intended for the wealthiest people in the country, and yet police officers and teachers were finding themselves subjected to a 40 per cent tax rate. If the thresholds were to remain at current levels, the number of people paying a higher rate of tax would be closer to 6.3 million, but the IEA is now calling for an overhaul of the tax system.

The IEA said:

“It is unacceptable to persist with a system that drags millions into paying a higher rate of income tax and erodes the aspirations of those on low pay to progress up the pay ladder.”

The Institute of Directors (IoD) believes that the higher rate threshold should be increased annually by the larger of either 2.5 per cent, RPI inflation or inflation of the average wage.

Will I pay the higher rate of tax in 2014-15?

If your income exceeds the basic rate threshold of £31,865 plus the basic personal allowance of £10,000, you are likely to pay the 40 per cent higher rate of tax. For those who take in between £41,866 and £150,000, tax will be deducted at 40 per cent. Any income above £150,000 will be taxed at 45 per cent.

How is my income taxed?

For most people, income up to £10,000 for the 2014-15 year will be tax free. Income between £10,001 and £41,865 will be taxed at 20 per cent. Income above this amount up to £150,000 will be taxed at 40 per cent. However, once your income exceeds £100,000, your personal allowance is reduced by £1 for every £2 of income. Once your income exceeds £120,000, the personal allowance is zero.

For advice on how to calculate your tax bill, contact us here at The Accountancy Partnership, or leave us a comment using the box below.

About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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